Friday, August 27, 2010

A lot of crazy stuff is being said this week about monetary policy, perhaps none of it crazier than this WSJ op-ed:

But deflation and inflation predictions could both be right in a sense, if you aren’t too fussy about strict definitions. In the late 1970s, the last time Americans suffered from manic interventionism from Washington, we had “stagflation,” a combination of minimal economic growth and double-digit inflation. It wasn’t pretty.

By the same token, a round square is possible if you allow the definition of “square” to include circles. However in the 1970s the price level was increasing rapidly (i.e., inflation) whereas “deflation” means a decrease in the price level. If you don’t use words properly, you wind up talking nonsense. Being fussy about strict definitions is a good idea.

You only thought that inflation was around 12% during the Carter years -- actually, it was 50% inflation, accompanied by 40% deflation. No wonder people were escaping by balloon over the border to Canada.

1 comment:

In a sense, you are literally correct in your last comment. If you check the detailed data for the CPI, even during high inflations some prices are falling and during the deflation of the 1930s some prices rose. The price level is, of course, an average--taking into account all prices changes weighted by their consumption. Economists spend a lot of time trying to figure out the underlying trend by looking at things like core inflation, median prices changes, comparing different price indexes and so on.